Air Quality and Climate Change

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By Michael Green and Paul Davies

Following decision C(2017)7124 of the European Commission (EC), the EC has launched its Work Programme for 2018 (WP 2018). WP 2018 outlines plans for achieving the EC’s primary policy objectives during the next 12 months — with particular attention to environmental issues.

WP 2018 outlines four “Focus Areas” (FAs) that envisage major work across programme boundaries. The EC has allocated a significant budget in order to facilitate such work at a “sufficient scale, depth and breadth”. Two of the four FAs, which specifically relate to environmental considerations, are described below.

By Paul Davies and Michael Green

The first solar farm has successfully launched in the UK without government subsidisation. Clayhill Solar Farm, a 10 megawatt (MW) site near Flitwick in Bedfordshire, is capable of generating enough power for 2500 homes. Clayhill’s developer, Anesco, is a private company specialising in the design and development of solar and battery storage sites.

Renewable energy projects like Clayhill have become increasingly viable in recent years due to the falling cost of solar panels and batteries. In particular, cheaper manufacturing costs have enabled solar generation to become cost-competitive with electricity from fossil fuels. However, despite these favorable conditions, the Renewables Obligation subsidy scheme — one of the UK government’s main mechanisms for encouraging renewable electricity projects — closed to new applicants in March 2017.

By Paul Davies and Andrew Westgate

Market research has long recognized China as the largest investor in its own domestic renewable energy industry. According to Bloomberg New Energy Finance, China invested US$102 billion in 2015 alone. However, a report by the Institute for Energy Economics and Financial Analysis (IEEFA) found that China’s dominance in renewables is rapidly growing overseas as well.

The report details China’s robust international investment activity. In 2016, for example, China made 11 outbound clean energy investments exceeding US$1 billion for a total of US$32 billion — a 60% increase from 2015. China also ranked as the fifth-largest investor in renewable energy projects in other emerging markets in 2016, totalling US$19.7 billion since 2005. However, according to the report, China still directs a majority of its investments in renewables towards the United States, Germany, and other developed countries.

The report also found that China currently accounts for one quarter of global renewable energy capacity and one third of all global investment in renewables. Chinese manufacturing has altered the economics of renewable power worldwide, making solar generation cost-competitive with electricity from fossil fuels such as coal and natural gas. As a result, official figures indicate that coal consumption, the main component of China’s carbon emissions, fell in 2016 for the third year running.

By Paul Davies and Andrew Westgate

Chinese policymakers have indicated that the country’s Emissions Trading System (ETS) — which will be the largest system of its kind globally and the centerpiece of Chinese climate change policy — is likely to launch in November 2017 “at the very earliest”. The delay will enable China to announce the launch at the next UN Climate Change Conference in Bonn, Germany. However, Chinese officials have privately indicated that this likely will be a “formal” launch only, with allocation of emissions allowances and compliance obligations coming into effect during 2018. As a result, several of the existing ETS pilot programmes in Chinese provinces and major cities have begun to announce new allowance allocations for 2017, including for sectors covered by the national ETS.

The delay reflects a number of policy challenges that regulators at the National Development and Reform Commission (NDRC), China’s primary economic policy-making body, have struggled with in designing the ETS. For example, difficulties in obtaining accurate emissions data for each industrial sector covered by the system, determining benchmarks for the allocation of free allowances to industry, and whether pilot programmes may use offset credits (Chinese Certified Emissions Reductions) to satisfy compliance obligations during the initial compliance period. Verifying emissions data has been an issue for regulators managing China’s eight pilot programmes, with the Hubei Province recently delaying its compliance deadline due to problems verifying total emissions for 2016. The carbon market remains concerned about a potential oversupply of offset credits and reports that policymakers will exclude offset credits from the initial compliance phase of the new National ETS.

By Paul Davies and Michael Green

On 8 July 2017, the G20 summit in Hamburg issued a Climate and Energy Action Plan for Growth (the Plan). The Plan reaffirms the commitment of the countries (excluding the United States (US) — which announced its intended withdrawal from the Paris Agreement) to work together to implement the UN Framework Convention on Climate Change (UNFCCC), the Paris Agreement, and the 2030 Agenda for Sustainable Development.

In summary, the Plan promotes the following measures:

  • The main commitments under the Paris Agreement, including the target to limit the temperature increase to 1.5 degrees Celsius and commitments to implement nationally determined contributions (NDCs)
  • Drafting long-term greenhouse gas (GHG) emission development strategies by 2020, for the period to 2050
  • Working towards affordable, reliable, sustainable, and low GHG emission energy systems as soon as is feasible
  • Promoting energy efficiency and improving international collaboration on energy efficiency
  • Scaling up renewable energy and other sustainable energy sources
  • Promoting access to modern and sustainable energy use for all
  • Enhancing climate resilience and climate adaption efforts
  • Aligning finance flows with the goals of the Paris Agreement
  • Mobilising climate finance by multilateral development banks (for example, the European Bank of Reconstruction and Development)
  • Phasing out inefficient fossil fuel subsidies

By Paul Davies and Andrew Westgate

In reforming and updating its environmental laws, China has until recently been focusing on air pollution. Attention is now turning to addressing water and soil pollution as well. For example, the Chinese government is now considering more robust penalties for those responsible for water pollution, indicating that the government could ban the building of homes and schools in areas with contaminated soil.

China’s issues with air pollution are well-known, with some urban areas experiencing particulate pollution levels exceeding those found in forest fires. A new study from Nanjing University’s School of the Environment estimates that smog kills 1.1 million people a year and is responsible for a third of deaths in China. As a result, the Chinese government is increasingly open to innovative prevention strategies. A recent example is the Liuzhou Forest City — designed by Stefano Boeri, an Italian architect famed for his “Vertical Forest” plant-covered skyscrapers. The Liuzhou Forest City will house up to 30,000 residents and is due for completion by 2020. Built across 175 hectares along the Liu River in Liuzhou, the Liuzhou Forest City will feature one million plants and 40,000 trees of over 100 different species that are intended to absorb 10,000 tonnes of carbon dioxide and 57 tonnes of pollutants annually, producing 900 tonnes of oxygen in the process. In addition to reducing air pollution, it is predicted that the plant life should reduce average air temperatures, create a noise barrier, and provide a habitat for wildlife. A high-speed electric rail line with geothermal energy-powered air conditioning and solar panels for electricity will connect the new development to the city of Liuzhou.

By Paul Davies and Michael Green

On 29 June 2017, the Task Force on Climate-related Financial Disclosure (TCFD) published its final recommendations. The TCFD set out information that companies should disclose to enable investors, lenders, and insurance underwriters to better understand how companies oversee and manage climate-related financial risk. Ultimately, the aim is to strike a balance between the need to raise standards for existing climate disclosure standards and the desire to achieve widespread adoption.

The TCFD released its draft report in December 2016, and updated the recommendations in the final report based on industry and public feedback from a public consultation.

The key updates to the final report:

  • Materiality: the recommended disclosures on strategy, metrics, and targets are subject to materiality tests. Disclosures related to governance and risk management recommendations should be provided (regardless of materiality) as many investors want an insight into the governance and risk management context in which an organisation’s financial and operating results are achieved. Furthermore, the TCFD also established a threshold for organisations that should consider conducting a more robust scenario analysis to assess the resilience of their strategies (this covers those in the four non-financial groups[i] with more than US$1 billion in annual revenue).
  • Simplification: simplifying the metrics and targets for non-financial sectors to provide:
    –  Clarity and consistency
    –  Encouragement for further development of metrics in the financial sector (typically, this covers banks, insurers, asset owners, and asset managers)
    –  Clarity regarding the link to financial impact
    –  Additional guidance and standard scenarios to ease implementation
  • Climate-related Financial Risk: providing additional information on the link between financial impact and climate-related risk and opportunities.

By Paul Davies and Michael Green

On 16 June 2017, the Bank of England (BoE) published an article setting out its response to climate change, explaining that climate change and society’s response to it presents certain financial risks. These risks arise through two main ways:

  • The physical effects of climate change such as droughts, floods and storms.
  • The impact of changes associated with transitioning to a lower carbon economy such as (i) developments in climate policy (ii) new disruptive technologies or (iii) the changing priorities of investors.

The BoE’s approach in mitigating the financial risks from climate change has two elements:

  • Actively engaging with firms that have climate related risks such as segments of the insurance industry. The BoE is “deepening” its work here, focusing on the insurance sector and starting to work in the banking sector.
  • Improving the resilience of the UK financial system by engaging with initiatives to support a smooth market transition to a low carbon economy. This includes taking a proactive interest in the Financial Stability Board’s (FSB) private sector on climate related financial disclosures (TCFD), co-chairing the G20 green finance study group on behalf of the UK and co-ordinating with other insurance regulators in the Sustainable Insurance Forum (SIF). The BoE is consolidating this international work by (i) liaising with other financial regulators and engaging with the private sector on climate related issues and (ii) considering related research and analytical work, such as reviewing frameworks for understanding the impact of climate change on the wider community.

By Paul Davies and Andrew Westgate

On June 1, 2017, President Trump announced during a speech at the White House that the United States will withdraw from the Paris Agreement, fulfilling a campaign pledge to end the agreement that the President argued would harm the U.S. economy. Supporters of the Paris Agreement had lobbied for the U.S. to remain in the agreement, including members of the Trump Administration and 360 companies that signed an open letter to the President. In the end, President Trump was swayed by the agreement’s opponents who argued it threatened America’s energy sector. Though under its terms the U.S. cannot withdraw from the Paris Agreement until 2020, the effect of the announcement was immediate as leaders around the world condemned the decision and pledged support for the agreement.

In relation to China, the decision to withdraw is significant in two respects. First, cooperation between the U.S. and China was a key driver of the negotiations leading to the Paris Agreement and crossing the agreement’s threshold of 55% of the world’s carbon emissions to become effective. Second, President Trump has framed the decision as part of a larger pivot away from international trade and cooperation, which has left China in the unfamiliar position of a leading champion of international trade. China’s President Xi Jinping called on the world to “remain committed to developing free trade and investment” in Davos earlier this year, a position expressed by the U.S. in the past. Alex Wang, a professor of environmental law at the UCLA School of Law noted that “[w]hile the US is breaking these ties, China — which has traditionally been more reserved in international affairs — is building them at breakneck pace.”

By Paul Davies and Rosa Espin

Spain is leading the fight against climate change with a proposed new Climate Change and Energy Transition Law.

The Spanish government regards climate change as one of the greatest challenges facing the country. Since 22 April 2016, the Paris Agreement (which sets out a global action plan to avoid climate change by limiting global warning to well below 2ºC), has been open for signature. Spain formally ratified the Paris Agreement in early 2017 and must now seek to implement measures to achieve the ambitious targets that it faces.

As an important consequence of these targets, in December last year the Spanish Climate Change Commission passed a proposal which urged the Government to develop a draft law on Climate Change and Energy Transition. This draft law will enable Spain to achieve its climate change and energy goals and promote competitiveness in the country. This proposed law is expected to regulate existing and future climate related measures, taking into account the climate change targets for the years 2030 and 2050.